TMI Blog1994 (4) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... sing. For the assessment year 1984-85 income returned was Rs. 7,45,316 as per the revised return filed but the total income was determined at Rs. 8,23,940 as per assessment order dated 30-12-1986. In this background, the Assessing Officer noted that the assessee has not distributed dividends of Rs. 2,53,907. Hence, he issued show-cause notice on 16-12-1987 and after considering the assessee's counsel's letter, the Assessing Officer imposed additional tax of Rs. 1,54,860 under section 104 of the I.T. Act, 1961. In short, the case of the Assessing Officer was that the assessee has not distributed any dividend and hence additional tax was levied. The case of the assessee was that it had no positive distributable income for declaring dividend. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmercial profits. In para 4 of the appellate order, the CIT (Appeals) stated that the assessee has transferred the long-term capital gains to reserve and also acquired assets out of the capital gains. When once it has been treated as a reserve and it has been utilised for acquiring assets, the question of treatment of the capital gains as commercial profits did not arise. The CIT (Appeals) also held that the statute barred debts should have been taken into account for the purpose of computation of distributable income. She has also stated that the capital expenditure incurred in the flat which was used for business purposes was also to be taken into consideration. In short, the CIT (Appeals) concluded that the Assessing Officer has not righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t item 10 at page 39 of the paper compilation, the estimated liability towards contractual obligation has been stated. Reference was also made to page 28 of the paper compilation wherein statute barred debts have been shown as current assets, loans and advances. Finally, reference to the decision of the Supreme Court, in the case of CIT v. Bipinchandra Maganlal Co. Ltd. [1961] 41 ITR 290 was made for the proposition that terminal profits cannot be taken into account for the purpose of section 23A of the Act. It was also stated that the source from which dividend should be distributed should be taken into account and the phrase "smallness of profits" was relevant and not "smallness of total income". The point to be noted was that the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "In ordinary circumstances, directors of business experience would never distribute amounts received by way of capital gains. These amounts would ordinarily be reserved for the purpose of replacement of assets sold so as to carry on the business of the concerned company in the normal manner." The Supreme Court in the case of Bipinchandra Maganlal Co. Ltd. held that the difference between the sale price and cost price was notional profit and for the same reason, the Bombay High Court in the case of Gannon Dunkerley Co. Ltd. held that the amount earned as capital gains must be held to be notional profits and concluded that availability of these gains in the hands of the company does not render these gains as commercial profits. In other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany because the directors of experience would normally credit the capital gains to the reserve account for the purpose of utilising for replacement of assets and in exceptional circumstances, it can be credited to the profit loss account also. In the instant case, there is evidence on record to show, as rightly pointed out by the CIT (Appeals), that the capital gains arising on the transfer of capital assets have been credited to the reserve and it is also borne on record that the assessee has in fact effected replacement of assets sold in the assessment year 1984-85. We have already indicated above the judicial dicta to the proposition that the capital gains arising on sale of capital assets could not be regarded as commercial profits ..... X X X X Extracts X X X X X X X X Extracts X X X X
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